International Aircraft Workouts: What Happens When Your Collateral Can Outrun the Repo Man?
As a lender, nothing is better than a financing package that requires little maintenance. Payments and reports received by their due dates are an expectation by all parties at the inception of a loan, but that is not always the reality of the situation once closing has occurred.
Some types of collateral are harder than others to retrieve in the event of foreclosure or repossession. Indeed, aircraft by their very nature present a workout scenario much more complicated than most other types of collateral even including other mobile collateral. Aircraft are highly mobile and have essentially unrestricted ability to vanish from the lender before the delivery of the default notice has even made its way through certified mail.
Subsequently, the securitization of the highly mobile assets requires extensive planning prior to the loan closing. Extensive investigation into the countries where the aircraft will be operated, physically hangered, and registered should be conducted even before the financing is ever approved. The type of financing vehicle chosen by the bank may very well reflect the deference or preference of courts in foreign countries to certain structures (i.e. finance lease vs. mortgage). By conducting the diligence on the front end, the lender can ensure that their collateral is properly securitized and, in the event, the financing goes south, the lender will have the peace of mind that repossession or foreclosure, as the case may be, won’t turn into an incredible time and money consuming venture.
That being said, one of the most important aspects of financing aircraft which are going to be located in other countries is to find reliable, responsive, and well-educated local counsel. Engaging local counsel during the due diligence phase is essential to determining the proper financing vehicle to be used as well as ensuring that the necessary filings and registrations have been made in order to properly secure the collateral. There are many countries which still have not ratified the Convention on International Interests in Mobile Equipment and the Protocol on Matters Specific to Aircraft Finance (the “Cape Town Convention”), and as such, International Registry procedures which many lenders are accustomed to at this point may not apply.
Also important is obtaining control over the asset, as opposed to just legal rights. One typical way with business aircraft is to contract directly with the aircraft management company and assure that the manager is reputable and signs onto a tripartite agreement with the lender and borrower. In the event of an event of default, the lender will want the comfort of knowing that the aircraft manager has physical possession of the aircraft and has a contractual obligation to follow the directions of the lender, including grounding and storage instructions, maintenance program upkeep, and insurance coverage.
Jumping forward to a default situation, the first step is to conduct a thorough review of the transaction documentation. Any notices that are sent to the borrower need to be sent in accordance with the notice provisions. In many cases, you may find that the loan documentation was written with faxing in mind and with no email notices allowed. In many situations, that is becoming a concern for lenders as many borrowers are disconnecting their faxing devices, most often without advising the lender. In addition, the lender should conduct a comprehensive lien search for the aircraft and the engines in order to determine what other creditors may have liens on the aircraft, if any.
In many workout situations, the lender and borrower may be able to reach interim terms through a forbearance agreement – perhaps allowing for a revised payment schedule or for additional payments or security. In the event that the lender and borrower are unable to come to an agreement or if the borrower defaults on the forbearance agreement, the lender may choose to proceed to repossess and/or foreclose on the Aircraft, situation depending. From this point, coordination between the lender, local counsel, and the aircraft manager is necessary to ensure that the collateral is secured during the process.
In an ideal situation, the borrower and lender will come to an agreement to have the borrower turn over the aircraft to the lender via a voluntary foreclosure. This is the shortest and most efficient process thought it has the downside that it will not eliminate junior liens that would be extinguished in a foreclosure sale. Short of a voluntary foreclosure, the lender may decide to proceed with self-help remedies if the jurisdiction where the aircraft is located allows for it. Self-help involves the lender engaging a reputable repossession agent to locate and operate the aircraft, bringing it to secure facilities where the remainder of the foreclosure process, including a public sale, may be conducted.
Self-help is not available in every jurisdiction, so judicial proceeds may be required for the lender to repossess the aircraft. Once again, working closely with local counsel will ensure that the necessary steps are completed in a timely manner. There are many aspects to consider when going through a judicial foreclosure or repossession including taxes which may be payable to local courts and whether the aircraft will be permitted to stay on the aircraft registry until it is positioned in a country of the lender’s choosing for registration.
For countries that have ratified the Cape Town Convention, lenders may elect to exercise standard default remedies under the security agreements entered into by the lender and borrower including selling or granting a lease of the aircraft, receive any income or profits derived from the aircraft’s usage, and lastly and most importantly, the ability to cause a de-registration of the aircraft, including exportation and movement of the aircraft, all without obtaining a court order, unless the country has declared otherwise. Local counsel should be asked to advise the lender of any special conditions of the country’s ratification.
While securing a loan with aircraft can be complicated by their highly mobile status, careful planning during the initiation of the financing discussions along with closely monitored coordination between the lender, lender’s counsel, local counsel, and the aircraft manager can help ensure that the aircraft doesn’t, in fact, outrun the repo man.